INNOVA JUNIOR COLLEGE JC 2 PRELIMINARY EXAMINATION...2016 44.3 235.6 Source: International Monetary Fund Extract 8: The Fiscal Consequences of Shrinking Population Japan’s population

INNOVA JUNIOR COLLEGE JC 2 PRELIMINARY EXAMINATION in preparation for General Certificate of Education Advanced Level Higher 2

ECONOMICS Paper 1 Additional Materials: Writing Paper and Cover Page

9757/01

29 August 2018

2 hours 15 minutes

READ THESE INSTRUCTIONS FIRST Write your name and class on all the work you hand in. Write in dark blue or black pen on both sides of the paper. You may use a soft pencil for any diagrams, graphs or rough working. Do not use staples, paper clips, highlighters, glue or correction fluid/tape. Answer all questions. Please begin each question on a fresh sheet of paper.

At the end of the examination, submit each case study question separately.

Attach a cover page to each case study question and write the question number on the cover page. At the end of the examination, fasten all your work securely together. The number of marks is given in brackets [ ] at the end of each question or part question. You are advised to spend several minutes reading through the data before you begin writing your answers. You are reminded of the need for good English and clear presentation in your answers.

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UK households in the

lowest 20% (by income)

Innova Junior College [Turn over

This document consists of 7 printed pages and 1 blank page.

Answer all questions Question 1

United Kingdom’s Food and Drinks Industry and Brexit

Table 1: Estimates for elasticities of demand for various items in the UK

Price elasticities of demand Income elasticities of demand

Bread and cereal -0.14 0.17

Fruit and vegetable -0.22 0.28

Meat -0.28 0.35

Beverage and tobacco -0.35 0.43

Source: Economic Research Service, United States Department of Agriculture

Source: https://www.gov.uk, accessed 10th August 2018 Extract 1: Trends in UK food and non-alcoholic drinks prices

In the UK, food and non-alcoholic drinks have risen in price since 2007, with rises ranging from 17% to 41%. Successive spikes in the price of agricultural commodities since 2007 have led to higher retail food prices. They have not returned to the low price levels of pre-2007. Food price rises have a strong effect on food shopping for low income households.

Source: https://www.gov.uk, accessed 10th August 2018 Extract 2: Food industry shaken by Brexit prospects

Figure 1: Trend in share of spending going on food in low income and all UK households

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Business and consumer confidence in the food and drink industry, by far the largest manufacturing sector in the UK, is increasingly fragile since the upheaval caused by the Brexit vote, with the UK voting to leave the European Union (EU). Despite climbing sales, three-quarters of Food and Drink Federation (FDF) members have reported soaring ingredient prices, plummeting product margins and concerns for the future raised by their EU workforce. This trend is expected by most companies to continue over the next year. The FDF’s UK-based members range from giant brands such as Coca-Cola and McVitie’s to small-scale producers such as the oatcake maker Maclean’s Highland Bakery. The above findings reflected the sentiment of a third of its members including small, medium and large food and drink manufacturers. It is calling for an “industrial strategy partnership” with government and for urgent assurances for the industry’s workforce from the EU that they will have the right to remain in the UK. 71% of companies employing EU staff say these employees have expressed concerns about Brexit, with about 8.7% businesses reporting that their EU employees intend to leave the UK. An estimated 130,000 of the industry’s 400,000 workforce are non-UK nationals – many from Eastern Europe, often doing valued seasonal work in agriculture and factories. “We share government’s view that we need to make the best of Brexit,” said the FDF’s director general Ian Wright. “Food and drink industry confidence is low. Slower revenue growth, coupled with prolonged business uncertainty, is affecting the industry’s ability to invest.” The FDF is also calling for urgent action from the government to ensure that essential imports of ingredients and raw materials from the EU and EU Free Trade Agreement (FTA) countries do not face tariffs or costly non-tariff barriers. Some British-based businesses have benefited from the weaker pound, which makes their exports more competitive – as long as they still have tariff-free access to the single European market.

Source: The Guardian, 12 Oct 2016

Extract 3: Industry leaders’ views on the implications of Brexit

Ian Wright of FDF said Brexit could lead to price increases by as much as 10%, and would result in reduced choice, availability and profitability of food and drink for UK consumers and businesses alike. Andrew Kuyk, Director General of PTF highlighted that any tariffs would have major implications across the food chain. He said that could result in shortages and increased prices, particularly in the short term, as the UK is not self-sufficient in many areas of the food chain. Even where the UK produces enough raw material to supply the demand they may not have physical production capacity or labour ability to make that work – and developing this all takes time and needs a level of confidence. Food manufacturers and retailers often need 12 - 18 months’ supply agreements particularly for certainty of supply through their relationships with primary producers.

Source: https://www.bordbia.ie, accessed 10th August 2018 Extract 4: UK exports and trading partners International trade really matters to UK economy and the government must use all resources available to boost exports in a post-Brexit UK. About 28% goods produced in the UK are sold abroad, with the main trading partners being the EU countries and the United States. The one exception to Western countries dominance of the top UK trade partners is China, which comes in

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sixth for exports. UK export a wide range of goods, including food and drink, machinery and parts, cars, jewellery, medicines and plastics. While export of goods are still ahead, service exports, which include financial services, IT services and tourism are increasingly important and they have grown every year.

Source: www.bbc.com/news/business, accessed 10th Aug 2018 Extract 5: New directions for post-Brexit UK At present, products move freely across the border between the UK and other EU member states. As all EU member states have access to the Single Market, there are no tariffs, quotas or taxes on trade and the free movement of goods, services, capital and people. As the UK leaves the EU, the UK government will need to negotiate several new trade deals with her European trade partners and with other countries. Brexit will therefore allow the UK to set its own trade and investment policies, however there could be costs in doing so on its own rather than as part of a group of countries, meaning whether the UK’s trade negotiating strength and efficiency would be greater outside the EU is uncertain. On the one hand, concluding deals might be easier for the UK alone, given the greater diversity of interests involved when the EU negotiates as a group. On the other, the smaller size of the UK market may mean other countries give higher priority to deals with the EU. There are claims that Brexit will offer UK the opportunity to grow their exports. For example, the food and drinks sector can improve the national defences against plant and animal diseases and benefit from the latest scientific advances with the UK government supporting the nation’s food producers more effectively. However nothing will be certain until negotiations formally begin.

Source: willistowerswatson.com, accessed 10th August 2018 Questions

(a) Explain why all the price elasticities of demand values in Table 1 are negative. [2]

(b) With reference to Table 1, explain the impact on UK consumers’ spending on meat when there is

(i) an increase in the price of meat, [2] (ii) a recession. [2]

(c) With reference to Figure 1 and the use of the concept of opportunity cost, compare

the effect of a rise in price of food on lower income UK households and other UK households.

[4]

(d) Explain the likely impact of Brexit on the UK consumers’ welfare. [2]

(e) Discuss the extent to which the survival of firms in the UK food and drinks manufacturing sector will be adversely affected “as the UK leaves the EU”.

[8]

(f) Extract 4 mentions that international trade really matters to UK economy and the government must use all resources available to boost exports in a post-Brexit UK.

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Discuss the measures that the UK government can adopt to boost their exports. [10]

[Total: 30]

Question 2

World Second Largest Economy Extract 6: China overtakes Japan as world's second-largest economy

China has leapfrogged Japan to become the world's second-largest economy, a title Japan has held for more than 40 years. Despite Japan's displacement from second slot, its leadership welcomed the figures as a boost to Asia and as an opportunity for the country's beleaguered exporters. Chinese incomes are rising: a record 1.41 million Chinese tourists visited Japan in 2010, eager to flaunt their newfound wealth by buying Japanese brand-name goods, from Canon digital cameras to Shiseido cosmetics. Japan now exports more goods to China than to any other country. Shipments to China accounted for 19.4% of total exports last year, with the US accounting for 15.4%.

Source: The Guardian, 14 Feb 2011 Extract 7: Key drivers of China’s economic growth

The official view in Beijing is that since 2014 the economy has entered a “new normal condition” of steadier, albeit slower growth. As the economy downshifts, Beijing is trying to wean its dependence on credit-fueled investment and government spending and move instead to a consumer-driven growth model. In addition, four years after China has declared war against pollution on 4 Mar 2014, China cities have cut concentrations of fine particulates in the air by 32 percent on average. It was reported that in order to reach pollution reduction targets set, China had prohibited new coal-fired power plants in the country’s most polluted regions, including the Beijing area. Existing plants were told to reduce their emissions. If they didn’t, the coal was replaced with natural gas. Large cities, including Beijing, Shanghai and Guangzhou, restricted the number of cars on the road. The country also reduced its iron- and steel-making capacity and shut down coal mines. Of course, the current air pollution levels still exceed China’s own standards and far surpass World Health Organization recommendations for what is considered safe. Bringing all of China into compliance with its own standards would increase average life expectancies by an additional 1.7 years. Complying with the stricter World Health Organization standards instead would yield 4.1 years.

Source: The New York Times, 19 Jan 2015 & 12 Mar 2018

Table 2: GDP Composition breakdown by percentage

China Japan

2010 2017 2010 2017

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Consumption Expenditure 48% 53% 77% 76%

Government Expenditure 13% 14% 19% 20%

Export Revenue 26% 20% 15% 16%

Import Expenditure 23% 18% 14% 15%

Source: World Bank

Table 3: Government debt (percentage of GDP)

Year China Japan

2010 33.7 207.9

2016 44.3 235.6

Source: International Monetary Fund Extract 8: The Fiscal Consequences of Shrinking Population

Japan’s population of 127 million is forecast to shrink by about one-third in the next five decades. The proportion of over-64-year-olds — currently about a quarter — is expected to reach 38 percent in that time frame, intensifying the financial and care burden on the working-age population. Currently, in Tokyo, there are twice as many job vacancies as applicants. The government is scrambling to cope, with policies aimed at boosting fertility and support for working mothers, a push for greater job automation and a softening of the nation’s traditional aversion to immigration. Shrinking populations pose a formidable fiscal challenge. Swelling spending on health and pensions mean Japan’s unable to rein in public debt that’s more than double its gross domestic product. In the government budget, social security accounts for one-third of spending and debt servicing one-quarter.

Source: Bloomberg, 17 May 2017

Figure 2: Japan: Real Wage vs Nominal Wage

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Source: OECD Extract 9: Accelerating Pace of Innovation in China

In recent years, China has become a major hub of innovative products and services. There are two major categories of innovations in China. The first consists of innovations in manufacturing. In recent years, there has been a remarkable increase in the number of Chinese companies focusing on research and development, of which Huawei Technologies has consistently placed among the top five companies worldwide for the number of patent applications filed for the past decade. In addition to Huawei, Chinese companies like Xiaomi, Oppo, and Vivo are among the global leaders by market share for android smartphones. The second category involves innovations led by platform companies that have arisen from the digital economy. In the mobile age, major online players like Baidu, Alibaba, and Tencent have used their core applications as launching pads for developing and expanding new services. For instance, Alibaba expanded the functions of its e-commerce site Taobao to launch digital pay app Alipay while Tencent drew on knowhow gained through its desktop messaging software QQ to develop its mobile app WeChat. In addition to small money transactions, these applications allow users to make train, airline, and hotel reservations, access ride sharing and food delivery services and pay for public services. Among other factors explaining this rush of innovation are China’s huge domestic market, the widespread availability of wireless Internet service, government policies supporting innovation, relaxed regulations, and a strong foundation in basic research. China is aiming to become a world leader in such areas as artificial intelligence and use of big data.

Adapted: Nippon.com, 30 Apr & 21 Jun 2018 Questions

(a)

(i)

Using Figure 2, account for the difference in Japan’s real and nominal wage from 2016 to 2017.

[2]

Real Wages

Nominal Wages

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(ii)

Explain one demand and one supply factor to Japan’s nominal wage trend from 2014 to 2017.

[4]

(b)

China’s policymakers’ has attempted ‘to wean its dependence on credit-fueled investment and government spending and move instead to a consumer-driven growth model’.

Explain the possible short-term and long-term consequences of the above attempt on China’s living standards.

[6]

(c)

In the light of the fiscal consequences of the shrinking population, assess the options in which Japan could reduce its government debt.

[8]

(d)

Discuss the view that China will eventually achieved sustainable economic growth just because it has become ‘a major hub of innovative products and services’.

[10]

[Total: 30]

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PRELIMINARY EXAMIANTION SUGGESTED ANSWERS

ECONOMICS UNIT @ INNOVA JUNIOR COLLEHE 1

IJC Preliminary Examination 2018 Paper 1 Question 1 Suggested Answers 2018 H2 Prelim Case Study Q1

(a) Explain why all the price elasticities of demand values in Table 1 are negative. Price elasticity of demand measures the responsiveness of quantity demanded of a good to a change in the price of the good itself. The negative values of the price elasticities of demand reflects the law of demand, which states that the price and quantity demanded of a good are inversely related. For example, as the price of a good like fruit and vegetable changes, the quantity demanded of fruit and vegetable will change in the opposite direction. Mark allocation Stating law of demand – 1 mark Explanation of inverse relationship between price and quantity demanded of a good – 1 mark Markers’ comments A large number of candidates accounted for the magnitude of PED instead of sign. Hence, many explained factors for PED < 1 instead of focusing on the law of demand as the reason gaining no credit for their explanation.

[2]

(b) With reference to Table 1, explain the impact on UK consumers’ spending on meat when there is

(i) an increase in the price of meat, As the PED value of meat is less than 1, a given increase the price of meat will lead to a less than proportionate fall in quantity demanded of meat. Consumers spending on meat, given by Price x Quantity, will increase as the increase in spending due to increase in price will offset the fall in spending due to a fall in quantity demanded of meat. Mark allocation Explanation of meaning of PED value – 1 mark Explanation of link between increase in price and consumers’ spending – 1 mark Markers’ comments Quite a number wrongly argued that since an increase in the price of meat causes the quantity of meat consumed to fall, there will therefore be less spending on meat without the use of the PED concept to consider which effect will be greater. Some others

[2]



incorrectly apply the YED concept instead. There is also tendency to confuse a change in demand with a change in quantity demanded.

(ii) a recession. As YED value of meat is positive, a recession, which results in a fall in income, will lead to a fall in the demand of meat as well. Hence, the overall effect will be a fall in the consumer spending of meat as the price and quantity of meat consumed falls. Mark allocation Explanation of meaning of YED value – 1 mark Explanation of link between recession and consumers’ spending – 1 mark Markers’ comments Quite a number used the magnitude of YED instead of the sign. The link between fall in income and fall in demand for food was not made too. Therefore, the impact on total expenditure is incorrectly explained.

[2]

(c) With reference to Figure 1 and the use of the concept of opportunity cost, compare the effect of a rise in price of food on lower income UK households and other UK households. Opportunity cost of a decision refers to the next best alternative forgone. A households’ income is either spent on food and drinks or other goods and services. With a rise in price of food, the household’s expenditure on food increases, as demand for food is price inelastic. There will then be a reallocation of more of household’s budget for food and drinks, which means opportunity cost incurred in terms of other goods and services that can be consumed. As food takes up larger proportion of income of lower income households compared to other households, with the increase in expenditure on food, they will have lesser income left. Hence, lower income households more likely to have to forgo non-essential goods compared to other households incurring greater opportunity cost. Mark allocation Explanation of concept of opportunity cost – 1 mark Explanation of effect of rise in price of food on lower income and other households with the use of Figure 1 – 3 marks Note:

[4]



If explanation did not use Figure 1 – max 2 marks If explanation shows application of the concept of opportunity cost but did not make comparison between lower income and other households – max 3 marks Markers’ comments There were some excellent responses for this question which demonstrated a clear understanding of the requirements of the question. While most were able to interpret Figure 1, many lost marks as they did not apply the concept of opportunity cost to explain the effect on household spending and make valid comparison.

(d) Explain the likely impact of Brexit on the UK consumers’ welfare. With Brexit UK is no longer part of the EU and tariff barriers on goods from the countries in the EU will be applicable, raising the prices of imports from the EU, leading to lower consumer surplus. There could also be reduction in choice of goods available to the UK consumers if producers cut down on some types of imports due to greater trade restrictions. Hence, UK consumers’ welfare will be lowered as a result. Mark allocation For a clear explanation of one impact of Brexit on consumers’ welfare. Markers’ comments Many students applied the concept of standard of living which resulted in imprecise responses. Quite a number merely lifted phrases from the extracts instead of explaining the implications of Brexit on UK before linking it to the impact on consumers’ welfare.

[2]

(e) Discuss the extent to which the survival of firms in the UK food and drinks manufacturing sector will be adversely affected “as the UK leaves the EU”. As the UK leaves the EU (Brexit), the firms in the UK food and drinks manufacturing sector could be facing greater cost and revenue pressures which can adversely affect their profits. As mentioned in Extract 2 and 3, Brexit is likely to lead to rise in cost of production due to rise in wages in the sector as UK faces lower supply of workers with the loss of EU workers and higher cost of imported raw materials with the resulting tariff barriers imposed on imports into UK. At the same time, greater uncertainty about the prospects of UK economy after Brexit has weakened consumers’ confidence, possibly resulting in lower demand for food and drinks.

[8]



.

Figure 1 illustrates the effect of the above changes on a firm in the industry. Assuming the firm’s objective is to maximize profits, the equilibrium price and output of the firm is given as OQ1 and OP1 where MR1 = MC1. The initial profits earned by the firm is FP1DE. With the increase in cost of production, the cost curves will shift to MC2 and AC2 while the fall in demand will shift the demand and MR curves to D2 and MR2 respectively. As such, the new equilibrium output and price is now OQ2 and OP2 where MR2 = MC2. The new profits earned by the firm is lowered as given by JP2LK. Hence, Brexit might affect the survival of firms adversely. However, the extent of the effect might vary for different firms in the sector. It depends on how much the firms are impacted by the rise in the cost of production. This in turn depends on how heavily reliant the firms are on imported raw materials for ingredients, labour from the EU and the nature of their production. Firms that are more reliant on imported raw materials, labour from EU are more labour-intensive in their production method are likely to be more adversely affected as their cost of production might rise by a larger extent. As the sector consists of small, medium and large firms (Extract 2), it is likely the initial profit margins of the smaller firms are lower as compared to the large firms. Hence, the smaller firms could find that their total cost rise even to such an extent that they are unable to cover their total revenue and thus less able to survive in the sector as compared to larger firms.

AC1

MC1

Price/Revenue/Cost

AC2

MC2

D P1 L P2

J Figure 1 E F

K

D1 D2

Output MR1

O Q1 Q2 MR2



It could also be dependent on the availability of strategies for firms to respond to the revenue and cost challenges. To counter the rise in cost of production, firms could either switch to domestic sources for their raw materials, improve the efficiency of their local workers or even switch to less labour-intensive production methods. To address their revenue challenges, firms can consider diversifying their markets overseas to make up for the fall in demand and total revenue. These measures enable them to maintain their profits and therefore survive. However, these measures do not take effect immediately. For example, it was mentioned in Extract 3 that developing some of these “takes time and needs a level of confidence”. It might also depend on the level of capacity of the firms in the sector. Smaller firms might not have as much resources as the larger firms to adopt the measures mentioned above. As such, they might be under more severe threat in the sector as a result of Brexit.

Level Descriptors Marks

2 Well-developed and balanced explanation of impact of UK leaving the EU on the firms in the UK food and drinks manufacturing sector. If only considered either revenue or cost aspects – max 4 marks

4 - 6

1 Under-developed explanation of some impact of UK leaving the EU on the firms in the UK food and drinks manufacturing sector with limited reference to context.

1 - 3

Evaluation

2 Use of appropriate criteria with relevant use of context to come to a justified stand.

2

1 Unjustified stand with limited/no reference to context.

1

Markers’ comments Overall, responses to this question are either descriptive or involved superficial analysis. While some tried to break down the effects of Brexit on the firms’ revenue and cost, subsequent discussion on how the firms’ ability to survive was weak, with many using the shutdown condition loosely without much consideration of the context in which this concept can be useful. While most attempt to provide a balanced explanation of why firms may or may not be adversely affected, there was little attempt in majority of the responses to address “the extent” to which the firms are likely to be adversely affected with reference to the case materials.



(f)

Extract 4 mentions that international trade really matters to UK economy and the government must use all resources available to boost exports in a post-Brexit UK. Discuss the measures that the UK government can adopt to boost their exports. With Brexit, UK would lose its access to the EU market and not be able to enjoy free movement of its products across EU anymore (Extract 5). With tariff barriers imposed on its exports, their goods will become relatively more expensive compared to other EU goods within EU. Hence, UK is likely to find the volume of its exports to EU being reduced as a result. Given that EU countries are major trading partners of UK, the fall in its export revenue is likely to be significant. With international trade being important to the UK economy (Extract 4), it is crucial that the UK government put in place sufficient measures to boost their exports so that the UK economy will not be too adversely affected. In light of the above, one immediate concern that the UK government needs to address is the continuation of access for UK exports to foreign markets. To achieve this, the UK government will need to initiate negotiation of free trade agreements (FTA) with its trading partners so that tariff barriers can be removed to ensure that UK exports can remain competitive in these markets. This should not only include individual countries in the EU and the US which are UK’s major trading partners but also other emerging economies like China which might be of increasing importance to the UK as well. It is important for UK not only to have access to more markets but also to tap on the growth in markets like China to boost the demand for their exports further. With rising income and growing affluence, UK is in a good position to export luxury goods like cars and jewellery to such markets as the demand for luxury goods is likely to be rising faster. However, the UK government faces some constraints in seeking FTA with its trading partners. As mentioned in Extract 5, “UK’s trade negotiating strength and efficiency” as an individual economy could be limited as compared to being in a regional grouping as the other countries might not perceive the UK market to be sizeable enough for their consideration. On the other hand, negotiating FTAs as an individual economy instead of being part of a collective grouping could be more advantageous as there is no longer a need to be bound by the interests of other countries. Thus UK might have greater success in achieving more favourable terms for its trade with the rest of the world. With the likelihood of Brexit having a negative effect on UK exports and uncertainty surrounding negotiation of FTAs, there is also an urgent need for the UK government to implement supply-side policies to boost

[10]



productivity and improve the quality of their products to ensure that they become more competitive in the international markets. In particular, the government needs to provide more funding to the key export sectors such as those mentioned in Extract 4. This should provide the needed resources and incentive for the producers in these sectors to engage in research and development and invest in better technology to lower their cost of production and boost their output. As mentioned in Extract 5, with the UK government’s support, the food and drinks sector can “improve the national defences against plant and animal diseases and benefit from the latest scientific advances” so that the yield from this sector can be improved. With UK having factor endowment in terms of highly skilled workers and more advanced technology, its economy is likely to have a comparative advantage in production of good that are more technology or research-intensive, like cars and medicines as well as services. Such investments could also be directed to further enhance UK’s comparative advantage in these areas by lowering the opportunity cost in the production of such goods. The above measures should enable the goods to be priced more competitively. In addition, an improvement the quality of its goods could lead to lowering of the price elasticity of demand for UK exports, allow them to withstand competition from other countries’ goods in the international markets. However, the above measures are not likely to take effect in the short term as time is needed for them to work. Hence, there might be a need for the UK government to complement it with another measure in the short run. For example, it was highlighted in Extract 2 that some “businesses have benefited from the weaker pound” as the price of exports becomes relatively lower in terms of foreign currency. However, this is beneficial only for those businesses that are not heavily dependent on imported inputs. Furthermore, as this depreciation was likely to be triggered by loss of confidence due to the prospects of Brexit, further depreciation will weaken confidence which is undesirable for UK’s economic outlook. In any case, this measure will only be of limited help in the short run as the more important areas of focus for the UK remains the negotiation of FTA and supply-side policies specifically targeted at the export sector to boost exports in the long run.


2 Well-developed explanation of the measures the UK government can adopt to boost exports with sufficient scope and reference to the context.

5 - 7



1 Undeveloped explanation of the measures the UK government can adopt to boost exports with limited reference to the context. OR A well-developed explanation of only one measure.

1 – 4

Evaluation

2 Use of appropriate criteria with relevant use of context to come to a justified stand.

2-3

1 Unjustified stand with limited/no reference to context.

1

Markers’ comments While most are able to explain relevant measures that the UK government can adopt, there is generally rehearsed answers which do not have much reference to the context given. Many answers focused on the use of depreciation and provided correct explanation of its mechanism but there was little consideration to its appropriateness in this case. Similarly, the use of supply-side measures tend to be explained in general terms rather than targeted specifically at boosting exports in this case. As such, the limitations of the measures were also generic in nature in most cases. Evaluative comments were also lacking in many of the responses.

[Total: 30] IJC Preliminary Examination Paper 1 Question 2 Suggested Answer:

(a)

(i)

Using Figure 1, account for the difference in Japan’s real and nominal wage from 2016 to 2017.

[2]

[1m] Describing the difference [1m] Explain the reason The gap between Japan’s real and nominal wage from 2016 to 2017, is widening. [1m] The widening gap between real and nominal wage is to the rise of inflation rate. Real wage is where the effect of inflation (sustained and inordinate increase in goods and services) has been eliminated in relation to prices in a selected base year (year 2014). [1m]

(ii)

Explain one demand and one supply factor to Japan’s nominal wage trend [4]



from 2014 to 2017.

Possible Demand Factor [2m] Possible Supply Factor [2m]

● Positive economic growth

Rise in purchasing power Firms increase output Labour is a derived demand

� DD for labour

● Ageing population or Shrinking population

� SS of labour

Conclude that � SS of labour > � DD for labour Rising nominal wages

Nominal wages S1

S0 W1

Wo

0 D0 D1

Quantity of Labour Qo Q1



(b)

China’s policymakers’ has attempted ‘to wean its dependence on credit-fueled investment and government spending and move instead to a consumer-driven growth model’.

Discuss the possible short-term and long-term consequences of the above attempt on China’s living standards.

[6]

Introduction Standard of living refers to the level of economic and social well-being of a population. As stated in the preamble, China’s policymakers has attempted to reduce dependence on credit-fueled investment and government spending and move instead to a consumer-driven growth model. Point 1: Possible short-term consequences on material SOL ● China economy is now the second largest in the world + China has a large

domestic market, well-endowed with resources

China is able to increase reliance on domestic consumption

● Rise in consumption expenditure (as seen from Table 2)

Improve material SOL

Define material SOL: Material well-being is indicated by amount of goods and services

an average person can have access to and this is commonly measured by GDP

per capita.

Consumers are now able to consume a wider variety of goods and services

Rise in AD Rise in real GDP Rise in short-term material SOL

Point 2: Possible long-term consequences on material SOL ● China’s policy makers reducing dependence on credit-fueled investment

Reducing China’s exposure to external volatility eg Eurozone debt crisis, World

Financial Crisis

Domestic firms now can earn more stable revenue & profits due to the increase

leverages on domestic C + Firms (Domestic & foreign) will increase investment

for production of goods to be sold to the large domestic market

Sustained economic growth

Rise in long-term material SOL

Point 3: Possible short-term & long-term consequences on non-material SOL However, economic growth does not necessarily leads to higher living standards. Living standards also comprise of qualitative aspects of life such as access to quality healthcare and education, living and working conditions, the number of hours worked as well as the access to a clean public spaces, that is, free from air, noise, and traffic pollution.



China’s current pollution levels adversely impacts its non-material living standards. From Extract 7, it is noted that China has declared a war against pollution in 2014. Since then, China has achieved some success in reducing pollution levels, though the current air pollution levels still exceed China’s own standards.

+ Sustained rise in GDP per capita Increase in tax revenue (income tax, corporate tax & sales tax) collected

Government can allocate more resources to reduce pollution levels

Larger rise in long-term non-material SOL as compared to short-term non-material SOL

Level Description Marks

Level 2 Well-developed explanation on the possible short-term and long-term consequences of the move towards consumption-driven growth model, on China’s living standards.

3-6

Level 1 Description of material and non-material living standards, without addressing to question requirements.

1-2

(c)

In the light of the fiscal consequences of the shrinking population, assess the options in which Japan could reduce its government debt.

[8]

Question Analysis:

Command Word Concept/Content Word Context

‘Assess’ Consider at least 3 options and weigh them so as to come to a conclusion about their effectiveness or appropriateness.

‘Options’

Demonstrate thorough understanding of policies to reduce government debt

‘Japan’

Consider the fiscal consequences of shrinking population in Japan

Introduction Shrinking population declining fertility and increasing longevity Explain the fiscal consequences of the shrinking population

● Rise in G : � in spending on age-related programmes (health and pensions)

● � in Tax Revenue collected (due to lower income tax revenue & sales revenue)



⇒ Ballooning and unsustainable public debt

⇒ Opportunity costs such as sharp cuts in other spending or necessitate large tax

increases that could hinder economic growth.

Given the above dire fiscal consequences, a multi-pronged policy approach is required.

Main Body: Option 1a: ��G - Gradual reduction in age-related programmes Address the growth of age-related government expenditure ● Reform public healthcare system to contain growth of public health spending

o Policies can help to ensure that new technologies reduce, rather than

raise, health care costs, without adversely affecting health outcomes. Eg:

use of health information technology (for example, to collect, store, and

share patient data) so as to reduce costs while protecting healthcare

outcomes.

o Government to provide greater support for primary and preventive care—

which helps improve health and reduce the need for more costly

treatments at a later stage—and improve provider payment systems to

control costs.

o Raise competition among insurers and service providers

In summary, containing the growing costs of health care would help reduce long-term fiscal risks of unsustainable public. On average, health care costs are projected to increase faster than economic growth. This is due not only to population aging but to technological improvements in health care that result in better but more costly services. Assuming that above policies are able to keep the growth of health care costs per capita in line with GDP per capita, health care spending will increase at a slower rate, reflecting only demographics. ● Reform public pension system to help offset the effects of aging. Eg: raise the

retirement age to complement efforts to boost the labor force participation of

older workers. It would also help to better align retirement ages to longevity gains

amongst many Japanese elderly.

Limiting factors A gradual pace of reform to pension and health systems would help to spread the burden across generations. There is greater urgency to move on healthcare reforms as Japan population is shrinking fast coupled with rising government debt.

Main Body: Option 1b: ��T – Strengthen tax systems It maybe impossible to fully offset the impact of demographics on age-related spending, thus necessitating broader public sector reforms to improve the public finances. Japan will need to strengthen its tax systems and improve the efficiency of public spending programs outside of pensions and health: ● Broader tax base – increase sales tax rate or goods and services tax



Reduce government debt

Main Body: Option 2: Improve firms’ international competitiveness As observed in Table 2, Japan’s export revenue only constituted 16% of GDP in 2017. Supply-side market-oriented policies, which involve measures to free up the markets or improve market incentives, can be used to improve firms’ export competitiveness.

For instance, the Japanese government can help small and medium-sized enterprises (SMEs) to grow and establish themselves via a partial tax exemption scheme which lowers the taxable profits of these companies. ➔ These tax rebates reduce firms’ unit COP and restore export-price

competitiveness.

As demand for exports is price elastic ↓ Exports price ↑ Export Revenue ↑ net

exports and improve trade balance ➔ Moreover, with the increase in profitability of investment, this allows Japan to

attract FDIs Both AD and AS increase sustainable EG

Also, long run supply-side interventionist policies, which concerns direct government intervention through financial support can be used to enhance Japan’s international competitiveness.

Pro-growth policies or pro-business policies that involves ↑ G on building up world class infrastructure enhancing capabilities. This spending on infrastructure can be

deliberately targeted industries such as biomedical, clean technology and robotics This will lead greater inflow of investments due to firms’ increased expected rate of return

Rise in corporate tax revenue collected in the long run

Reduce government debt Main Body: Option 3: Raising labour productivity & labour force participation rate Long run supply-side interventionist policies, such as subsidies for retraining can help to counter shrinking population The government can introduce the government introduced new initiatives to support life-long learning and deepening of skills. The SkillsFuture Credit can be made available for all Japanese above 25 to enhance their skills in work related areas. The use of subsidies for education and retraining enables workers to gain skills relevant in the economy.

➔ Increase in skills level + labour productivity especially for low/mid-skilled workers



increases in employability & increase labour force participation rate, especially for women and older workers, could help mitigate the impact of aging. Limiting factors Assuming constant productivity per worker, increasing labour force participation rates can increase GDP by increasing the number of workers, which would offset or delay some of the projected impact from aging. Other option Measures typically aim to offset the direct costs (through baby bonuses, family allowances, tax incentives) and opportunity costs (through parental leave, subsidized child care, flexible work schedules) of childbearing. However, a “birth rate” solution to ageing is unlikely to work for most developed economies, including Japan. The pronatalist policies seem to have only modest effects on the number of births, although they might affect the timing of births, and to have a positive impact on the labour supply decisions of mothers.

Evaluation Weigh at least 2 policy options and comment that Japan’s government debt is likely to grow given its rapidly shrinking population and Japanese reluctance to welcome large inflows of foreign investment and talents. A multiple-prong approach should be taken to contain the rise in government expenditure as well as to sustained raise in labour productivity in the long run.

Level of Response Marking Scheme (LORMS)

Knowledge, Understanding, Analysis

L2 For a balanced and well-developed analysis of appropriate policy options that Japan government can employ to reduce its government debt. Answer is well-supported with evidence from the case material.

4-6

L1 For an inadequately developed answer which attempts to explain how policy options can reduce Japan’s government debt. Answer is supported with some evidence from the case material.

1-3

3m for Evaluation

E2 Valued-judgement on whether relative effectiveness of policy options Japan government should employ, to reduce its government debt.

2

E1 Incidental evaluative comments. 1



(d)

Discuss the view that China will eventually achieve sustainable economic growth just because it has become ‘a major hub of innovative products and services’.

[10]

Command Word Concept/Content Word Context

‘Discuss’ Set out both sides of an argument (for and against), and come to a conclusion related to the content and emphasis of the discussion. There should be some evidence of balance, though not necessarily of equal weighting.

‘Sustainable Economic Growth’

Demonstrate thorough understanding of factors to achieve sustainable economic growth

‘China’

Consider the context of China economy

Introduction Sustainable growth refers to growth that can be maintained without creating other significant economic problems such as resource depletion and environmental degradation, particularly for future generations. It implies a positive and stable growth rates over an extended period of time. Thesis: Yes, China will eventually achieve sustainable economic growth just because it has become ‘a major hub of innovative products and services’ China has become a major hub of innovative products and services 1. Innovations in manufacturing eg R&D by Huawei Technologies

2. Innovations in digital economy eg Taobao digital pay app, Alipay

1. Innovations in manufacturing

Process manufacturing innovations more cost-efficient methods of production lower unit COP increase SRAS reduce GPL

� in price of domestic goods

� in price competitiveness of exports As DD for China’s manufacturing exports is price elastic

� X revenue

Product manufacturing innovations improvement in product quality Rise in non-price competitiveness of X

Further � DD for X of China X rev will expand further Entice greater inflow of FDIs

The above increases in X and I � in AD, � demand-deficient unemployment rate increase in real national income from Y1 to Y2



At the same time, accumulation of new capital increases in productive capacity increases in LRAS from LRAS1 to LRAS2

Non-inflationary sustained economic growth (�AD + �LRAS) Process manufacturing innovations include manufacturing firms seeking less polluting methods of production (Extract 7: China had prohibited new coal-fired power plants in the

country’s most polluted regions) China will eventually achieve sustainable economic growth

Anti-Thesis: No, other factors are also critical in determining whether China will eventually achieve sustainable economic growth Factor 2: Ability of workers to reskill and upskill The shift towards consumption-driven growth model

➔ Shifting trade flows (China moving to own sources of FOPs) & increase R&D

capabilities

➔ Upgrading of industrial structure Loss of CA in re-export industries

➔ Rise in structural unemployment since some jobs become redundant and the

retrenched workers are unable to move into the new industries with the mismatch of

skills

Slower economic growth

On the other hand, workers who are able to work with the new technology will be able to earn higher income levels widen income gap between these two groups of workers creating more inequity in the country as the rich can consume more while the poor will consume less with lesser dollar votes

General Price level

Real National Income 0

LRAS1 LRAS2

AD1

Y1 Y2



Factor 3: Ability of government to reduce pollution levels to World Health Organisation recommendations The Chinese government ability to enable greater use of renewable energy such as solar, wind, nuclear and other greener energy sources Possible policy options: ● Imposition of carbon tax on polluting manufacturers based on CBA, where tax=MEC at

output (MSB=MSC) ● Imposing regulatory standards

● Investment in greener technology eg increase govt spending to boost R&D efforts in green technology

Reduce CO2 emissions & able China to meet WHO air pollution standards Reduce environmental degradation & improve non-material welfare of workers as they now enjoy better air quality and are less likely to suffer respiratory illness in future Achieve sustainable growth Evaluation Higher government expenditure in greener technology may lead to reallocation of resources from other sectors in need.

Optional factor: Ability of China to continue reaping the benefits of globalisation Currently, US President Donald Trump has shaken the foundations of global trade, slapping steep tariffs on billions of dollars' worth of goods from the EU, Canada, Mexico and China. Thus, whether China can continue to achieve sustainable economic growth depends on China’s ability to harness the gains of globalization. Eg: The Chinese government is actively and directly intervening to development China’s infrastructure with other nations. China's vision for Eurasia is its "one belt one road" strategy, a plan to wrap its own infrastructure and influence westward by land and by sea. The land route is the most ambitious project to integrate continental Asia and Europe. The sea route allows for Chinese ports and bases to facilitate trade through the Indian Ocean to the Horn of Africa and the Mediterranean. ● This will allow for greater flow of trade, increasing China’s export revenue and actual

economic growth.

● The cost of obtaining raw materials may also be lowered due to cheaper imports coming

into China, hence reducing imported inflation and cost push inflation, leading to increase

of SRAS and hence NY increases (actual economic growth) and general price level falls

(Diagram to show SRAS increasing right).

● In addition, better infrastructure allows for productive capacity to increase for China as it

attracts more investments in the long term. This increases the LRAS, hence allowing for

potential economic growth (Diagram to show LRAS increasing right).

Evaluation



Building of such massive infrastructure such as roads and sea ports will require huge government spending from the Chinese government. If the government is not prudent with its spending, it could potentially lead to high government debt. Furthermore, these infrastructures require long term maintenance from the Chinese government which requires more fiscal spending from them in the long run.

Overall Evaluation

Weigh the factors and comment on the relative importance of the factors. Level of Response Marking Scheme (LORMS)

Knowledge, Understanding, Analysis

L2 For a balanced and well-developed discussion on the factors to achieve sustainable economic growth. Answer is well-supported with evidence from the case material.

5-7

L1 For an inadequately developed answer which attempts to explain the factors to achieve sustainable economic growth. Answer is supported with some evidence from the case material.

1-4

3m for Evaluation

E2 Valued-judgement on the significance of the factors to achieve sustainable economic growth.

2-3

E1 Incidental evaluative comments. 1

INNOVA JUNIOR COLLEGE JC 2 PRELIMINARY EXAMINATION in preparation for General Certificate of Education Advanced Level Higher 2

ECONOMICS Paper 2 Additional Materials: Writing Paper and Cover Page

9757/02

11 September 2018

2 hours 15 minutes

READ THESE INSTRUCTIONS FIRST Write your name and class on all the work you hand in. Write in dark blue or black pen on both sides of the paper. You may use a soft pencil for any diagrams, graphs or rough working. Do not use staples, paper clips, highlighters, glue or correction fluid/tape. Answer three questions in total, of which one must be from Section A, one from Section B and one from either Section A or Section B. Please begin each essay question on a fresh sheet of paper.

At the end of the examination, submit each question separately.

Attach a cover page to each essay question and write the question number on the cover page. At the end of the examination, fasten all your work securely together. The number of marks is given in brackets [ ] at the end of each question or part question. You are advised to spend several minutes reading through the data before you begin writing your answers. You are reminded of the need for good English and clear presentation in your answers.

2

©IJC 9757/02/IJC/18

Innova Junior College [Turn over

This document consists of 3 printed pages and 1 blank page. Answer three questions in total.

Section A

One or two of your three chosen questions must be from this section.

1 Discuss the likely combined effects of economic growth and a rise in Goods

and Services Tax (GST) on consumers and producers in different product markets in Singapore.

[25]

2 Another firm, Tada has entered Singapore’s ride-hailing industry, joining a slew of others which made similar moves following Uber’s exit. These firms are going up against the incumbent Grab and the market is set to get even more crowded with Indonesian ride-hailing giant Go-Jek’s impending entry.

(a) Explain the strategies a firm can adopt to compete in the ride-hailing

industry. [10]

(b) Discuss whether the entry of new firms in various industries necessarily

results in higher society’s welfare.

[15]

3 Markets may not function well when market participants do not have complete and accurate information, or when one market participant has more information than another.

(a) Using examples, explain how information failure might cause markets to not function well.

[10]

(b) Discuss the appropriate measures to tackle information failure in the

markets for different type of goods.

[15]

3

©IJC 9757/02/IJC/18

Section B

One or two of your three chosen questions must be from this section.

4 (a) Explain the limitations of using Real GDP per capita to compare

standard of living between countries.

[10]

(b) Discuss whether a depreciation in exchange rate of a country will improve the standard of living of her population.

[15]

5 Explain why strong economic growth is important but insufficient for most developed economies and discuss appropriate policies governments can adopt to achieve inclusive growth in their societies.

[25]

6 Globalisation often has influences on economic agents in an economy. Consumers, producers and government are affected by the increase in trade, labour and capital mobility from globalisation. Discuss whether globalisation will always be desirable to the different economic agents in an economy.

[25]

- End of Paper -

4

©IJC 9757/02/IJC/18

BLANK PAGE

PRELIM SUGGESTED ANSWERS

ECONOMICS UNIT @ INNOVA JUNIOR COLLEGE 1

2018 H2 Prelim Essay Q1

Question: Discuss the likely combined effects of economic growth and a rise in

Goods and Services Tax (GST) on consumers and producers in different product markets in Singapore. [25]

Suggested Answer

Explain effects of economic growth on consumers and producers in different

product markets

- Economic growth – rise in real national income and hence rise in household

incomes

- Impact on product markets depends on the income elasticity of demand of

products:

● For normal goods with positive YED, demand would increase.

Necessities such as rice (0<YED<1), demand would increase less than

proportionate to the increase in income whereas for luxury goods such

as cars (YED>1), the demand would increase more than proportionate

to the increase in income.

➔ For normal goods, consumers’ expenditure and hence producers’

revenue would increase as both price and quantity increases,

ceteris paribus.

● For inferior goods with negative YED such as instant cup noodles,

demand would decrease.

➔ Consumers’ expenditure and hence producers’ revenue would

decrease as both price and quantity decreases, ceteris paribus.

Explain effects of a rise in GST on consumers and producers in different

product markets

- GST is an indirect tax on producer which raise unit COP (since GST is imposed on intermediate goods and raw materials) and thus decrease SS since producers will reduce production at any given price. The supply curve will shift upwards in a pivotal manner since it is an ad valorem tax (% tax). This means that the higher the initial market price, the larger will be the tax amount and hence both original and new supply curves diverge.

- The market price rises and market quantity falls. Impact on consumers’

expenditure and producers’ revenue depends on price elasticity of demand for products. ● Assuming ceteris paribus and similar initial market prices of the goods

in the 2 markets, when SS falls due to GST, the good with price inelastic demand will result in a more than proportionate increase in price and less than proportionate fall in Qdd.



➔ Consumers’ expenditure increases (hurt consumers as they pay higher price and enjoy lesser units of good)

➔ Rise in GST would result in less revenue earned by the producers since they need to pay the government the GST from whatever they received from the consumers. Some firms in the market may end up with subnormal profit which may cause them to shut down.

➔ There is a greater negative impact on consumers as compared to producers, if demand is more price inelastic than supply.

● On the other hand, if the demand of good is price elastic, then there will

be a less than proportionate rise in price and more than proportionate fall in quantity. Consumers’ expenditure falls. ➔ Hence in this case, the adverse impact on producers will be greater

since spending by consumers fall and yet producers have to pay the GST when supply is more price inelastic than demand.

Explain combined effects of economic growth and a rise in GST on consumers

and producers in different product markets

- Market for necessities e.g. Rice (normal good with price inelastic demand)

expenditure/ revenue rise

● Given that 0<YED<1, the rise in income leads to a less than

proportionate increase in demand for rice increase in consumer

expenditure, ceteris paribus

● As rice has a high degree of necessity as a staple food, its demand is

price inelastic the rise in price (due to rise in GST) will lead to a less

than proportionate fall in Qdd consumer expenditure increases,

ceteris paribus

Combined reinforcing effect: Rise in consumer expenditure/ producer’s revenue in the market for rice

- Market for luxury goods e.g. Cars (normal good with price elastic demand)

impact on expenditure/ revenue is uncertain

● Given positive YED>1 as car is a luxury good, the demand for cars will

increase more than proportionate to an increase in income large

increase in consumer expenditure, ceteris paribus

● As expenditure on cars generally take up a large proportion of an

average household income, its demand is likely to be price elastic

the rise in price of cars (due to rise in GST) will lead to a more than

proportionate fall in Qdd consumer expenditure falls, ceteris paribus

Combined effect on consumer expenditure is uncertain – depends on

the relative shift of demand and supply. The large increase in demand for

cars (due to YED>1) is likely to outweigh the fall in supply of cars, resulting in a rise in consumer expenditure/ producer’s revenue.



EV: However, for such luxury goods, the initial prices are high and so the amount of

GST to be paid is likely to be high large rise in COP and hence large fall in SS

which may be greater than the rise in demand so, overall consumer expenditure/ producer’s revenue may fall instead.

- Market for inferior goods e.g. instant cup noodles (with price elastic demand)

expenditure/ revenue fall

● Given negative YED as instant cup noodles are deemed as inferior

good, the demand will fall when income increases as people would

prefer to consume better quality food in restaurants fall in consumer

expenditure, ceteris paribus

● As there’s availability of many other food substitutes, the demand for

instant cup noodles is price elastic rise in price (due to rise in GST)

will lead to a more than proportionate fall in Qdd consumer

expenditure falls, ceteris paribus

Combined reinforcing effect: Fall in consumer expenditure/ producer’s revenue in the market for instant cup noodles

Conclusion

As analysed above, the combined effect of economic growth and rise in GST on

markets of normal goods with price inelastic demand is an unambiguous rise in

consumer expenditure while markets of inferior goods with price elastic demand

would see an unambiguous fall in consumer expenditure.

EV: Outcome is uncertain for other combinations (e.g. inferior good with price

inelastic demand; normal good with price elastic demand) depends on the relative

magnitude of change in demand and supply

EV: All the above analysis assumes ceteris paribus condition holds – not valid in the

real world as there are many other factors which may also affect demand and supply

of products. For e.g. if population size in SG increases, overall demand for all types

of goods may rise, increasing consumers’ expenditure and producers’ revenue in different product markets.

EV: GST is a regressive tax greater burden on lower-income groups who pay a

larger proportion of their income as taxes. Assuming same rise in income for all

consumer groups, the lower-income consumers will be more negatively affected by

the rise in GST especially on normal goods (necessities) with more price inelastic demand than supply



Suggested Mark Scheme

Knowledge, Application/Understanding and Analysis L3 For an answer that uses appropriate demand, supply and elasticity

concepts as analysis to explain the combined impact of economic growth and rise in GST on consumers and producers in different product markets. Good use of diagrams to provide an analytic explanation.

15-20

L2 For an answer that uses demand and supply framework with limited analysis to explain the combined impact of economic growth and rise in GST on consumers and producers in different product markets. Diagrams are not used effectively as analytical tool. Max 12 if answer only analyze combined impact on 1 product market. Max 9 if answer only analyze impact of economic growth or rise in GST.

9-14

L1 For an answer that shows some knowledge of economic growth and GST with little/ no economic analysis. For an answer that consists of huge conceptual errors.

1-8

Evaluation E3 For an answer that uses analysis to support an evaluative

conclusion on the combined impact of economic growth and rise in GST on consumers and producers in different product markets in Singapore.

4-5

E2 For answer that make some attempt at evaluation. 2-3 E1 For an answer that give unsupported evaluative statement 1



Another firm, Tada has entered Singapore’s ride-hailing industry, joining a slew of others which made similar moves following Uber’s exit. These firms are going up against the incumbent Grab and the market is set to get even more crowded with Indonesian ride-hailing giant Go-Jek’s impending entry. Explain the strategies a firm can adopt to compete in the ride-hailing industry. [10] Approach Students should recognize that the question is on the conduct of firms. Specifically strategies to complete can include both price and non-price competition strategies. The question is also open to the type/nature of firm in the ride-hailing industry. i.e Students may explain strategies of existing or incoming firms. Size of firms may vary too.

1) Price strategy (Increase revenue)

- Incumbent firm may adopt predatory pricing of which the service is set at a

very low price with the intention to drive competitors out of the market or to

create barriers to entry for potential new competitors.

- When price falls, given that demand for the services are price elastic given

the number of substitutes platform, there will be a more than proportionate

increase in Qd of the firm’s service and TR increases. Hence, profits

increases ceteris paribus

2) Non-Price strategy (increase revenue or lower cost)

- Expand services provided to open new markets and expand revenue

sources. Eg Grab Shuttle Plus or Grab’s food delivery service or Ryde’s on-

demand courier services

B

F

AC

E

D

C

A

AR1 MR2

AR0

Quantity

Price

Q0 Q1

P1

P0

MC0

MR1



Figure 1

o These services increase market demand for the company’s services

increasing AR AR shifts right from AR0 to AR1 Increase in TR and

hence profits (CP0AB to FP1DE)

- Mergers and Acquisitions

o Existing firms can merge or acquire other firms Eg Grab acquired

Uber’s Southeast Asia’s Operations to achieve a combined business

as the leader in platform and cost efficiency in the region.

o Grab can then integrate Uber’s ridesharing and food delivery business

in the region into Grab’s existing multi-modal transportation and fintech

platform. Expansion of output results in technical EOS cost

savings profits increases when unit COP falls, ceteris paribus

o Also, AR for Grab increases and become more price inelastic as

competition reduces. TR revenue increases.

- Innovation in product and service

o Grab develop GrabPay- Mobile Wallet Payment Solution and tie up

with business to utilise this as a cashless payment solution beyond

rides. Grab Rewards points earned can also be used to redeem deals,

discounts etc

o All these encourage the use Grab ride hailing services and transform

consumers’ habits in cashless payment more demand increase in

AR increase in TR

- Improve branding and reputation

o Tada competes by attracting safe and quality drivers so quality

services can be provided. Company charges zero commission and

offer reward incentive for safe driving. It also emphasizes careful

review of drivers rewards riders for accurate feedback

o With emphasis on safety, some consumers may demand for Tada’s

services instead increasing TR. Leve

l

Descriptor Marks

L3 Well–developed explanation of price and non-price strategies for

firms to compete in ride-hailing industry. Strategies should

8 – 10



address increase in TR or lower TC for firms.

L2 Underdeveloped explanation of price and non-price strategies for firms to compete in ride-hailing industry.

Max 5m: For explanation of strategies that address increase in TR

or reduction of TC only. Strategies may not be applied to the ride-hailing industry.

5 – 7

L1 Pure listing/description of strategies. Concept errors present. 1 – 4

Discuss whether the entry of new firms in various industries necessarily results in higher society’s welfare. [15] Approach The question tests on performance of firms. Students should interpret society’s welfare as impact on consumers, producers and government. Analysis should be anchored on efficiencies concepts, profits, price, quantity, choice etc. Answers should also present two-sided arguments and on the extent of impact. Introduction Entry of new firms affects market share and power of existing firms. This results in various impact on economic agents of the society. There are many factors affecting the impact. This depends on type of industries and goods as well as different governments. Thesis: Entry of new firms in various industries results in higher society’s welfare

AR1

Quantity

Price

Q0 Q1

P0

P1

MC

MR1

E

AC D

B A

C

F

AR0 MR0



Figure 2 Entry of new firms increase competition in the industry existing firms faces a fall in AR and become more price elastic AR shifts left from AR1 to AR2 Price and Quantity of firm falls from P0 to P1 and Q0 to Q1 Firms are less allocative inefficient as mark-up between price and MC reduces (P0C to P1F). With fall in prices, consumers can enjoy cheaper goods and services of higher variety and quality. Consumer surplus increases.

- Eg: Renowned national carriers have been hammered by budget carriers

such as AirAsia at the low end of the market, while Persian Gulf airlines like

Emirates Airline and Qatar Airways have eaten into their business for

premium long-haul flights This led to the airlines to engage in serious

restructuring efforts, searching for new ways to make money and frantically

cutting costs Examples include investment in latest aircraft and

technology and investment in cabin crew to deliver high quality services

(higher dynamic efficiency as incentive to innovate increases) consumers

hence benefit more cheaper tickets and higher quality services.

- EV: However firms may also lose the supernormal profits and hence its ability

to innovate. In extreme cases, subnormal profits maybe earned (Fig 2) and

firms may shut down. Inventive to compete must be balanced with ability to

innovate for dynamic efficiency to be achieved. Innovation in the airline

industry maybe restricted only to the bigger national carriers rather than the

budget airlines which are making only low supernormal profits

- EV: In case of ride-hailing market in Singapore, Grab has obtained a high

level of market share and loyalty among ride-hailing customers. It will be

difficult for Tada, an incoming firm with little market presence to compete

efficiently. Hence, Grab might not change its behaviour and no impact will

effect.

Firms may become more productive efficient as they are more concerned with being more cost efficient when more firms enter the market. When firms review the optimal combination of labour and capital to produce the goods, cost can be reduced Productive efficiency improves and firms may still maintain their profits.

- EV: For ride-hailing industry, threat of competition is high (high contestability)

and current level of competition is high as start-up cost is relatively low, with

dependence on contract labour with no inherent loyalty or specialized skills,

and have free apps that can be downloaded in seconds. Firms are more likely

to be productive efficient so as to maximise profits and ensure survival. On

the other hand, industries of high levels of barriers to entry may not see the

same result.



Overall, with reduced market dominance, market efficiencies can be achieved while efficient market conduct can be maintained. Overall productivity, innovation, and competitiveness of markets of the country can be promoted. This may also promote export competitiveness of goods and services and improve AD and BOP of the country, achieving better macroeconomic performance of the country.

Anti-thesis: Entry of new firms in various industries may not result in higher society’s welfare

- With rising competition existing firms may lack the scale to reap sufficient

IEOS especially in country of small market size like Singapore. Costs of firms

increases unable to remain profitable firms close down and retrenchment

occurs. When market consolidates, industry may still be dominated by a few

large firms.

- Eg: In case of natural monopoly, which is a type of monopoly that exists due to high fixed or start-up costs such as Public Rail Transport and Energy Providers. With natural monopolies, economies of scale are very significant so that minimum efficient scale is not reached until the firm has become very large in relation to the total size of the market

- Minimum efficient scale (MES) can only be achieved when one firm has exploited the majority of economies of scale available and is the lowest level of output at which all scale economies are exploited.

- With entry of new firms and rising competition, natural monopoly cannot remain profitable shut down and goods cannot be supplied.

EV: However, without regulation, natural monopoly will produce at MC=MR and charge at Pe while producing at Qe, earning high level of profits. Protecting them against competition could worsen such behaviour. Regulation on pricing and output must be in place i.e AC/ MC pricing so as to ensure the benefits of protecting the natural monopoly outweighs the costs.

Other factors affecting extent of impact on society’s welfare

- Impact more significant on markets dominated by one or few firms. For MC

industry such as online blogshops, the impact on change in firms’s behaviour

could be less significant as the market was highly competitive to begin with.

- Similarly, if market has been highly contestable, firms; behaviour are already

in check- productive and dynamic efficient. Entrance of more firms could

erode profits and reduce existing firm’s ability to innovate less dynamic

efficient and worsening society’s welfare

Conclusion Adequate competition results in better market efficiencies and outcome, benefitting consumers and governments. Producers, however, are more likely to suffer from loss of



profits when their demand is competed away. However, this depends on the strategies the firm undertake and the type of industries and countries the firms exist in. Some industries such as natural monopoly ones would require domination of one firm in the market. In small economies such as Singapore, too many firms in the market may result in loss of IEOS on existing firms when small size of market cannot sufficiently provide a large enough output for firms. In such cases, a good balance must be struck between competition and protection of these firms to allow them to be profitable.

Level Descriptor Marks

L3 A balanced and well-developed answer on the impact of entry

of new firms on society’s welfare. Answer should address

various aspects of welfare and different agents and various industries.

8 – 10

L2 An under-developed answer on the impact of entry of new firms on society’s welfare.

Max 5: one-sided answer addressing only the thesis or anti-thesis.

5 – 7

L1 A one-sided answer which merely lists and describes the impact of entry of new firms on society’s welfare.

Many/Serious conceptual errors; mainly irrelevant points that does not address the question requirements.

1 – 4

Evaluation

E3 For an answer that arrives at an analytically well-reasoned

judgement on the impact of entry of new firms on society’s

welfare in various industries. Might also question any unstated assumptions to arrive at this well-reasoned judgement.

4 – 5

E2 For an answer that makes some attempt at evaluation, but

does not explain adequately their judgement or base it in

analysis, about their judgement on the impact of entry of new firms on society’s welfare

2 – 3



E1 For an answer that gives an unexplained, unsupported

evaluative statement on the impact of entry of new firms on society’s welfare

1

3 Markets may not function well when market participants do not have complete and accurate information, or when one market participant has more information than another.

(a) Using examples, explain how information failure might cause markets to not function well.

[10]

Suggested Answer (a)

Introduction: Briefly interpret key terms

Information failure exists when some, or all of the market participants do not have

perfect information/knowledge (often relating to costs and benefits) needed to make

an informed decision (i.e. as highlighted in the preamble). As a result of information



failure, decisions made by rational economic agents may lead to inefficient outcomes in markets causing markets to not function well (i.e. Market to fail).

Body 1: Using an example, explain how imperfect information leads to market failure.

Definition: When market participants do not have complete and accurate

information (i.e. imperfect information), they lack the necessary information to make

informed decisions, which lead to less than optimal allocation outcomes in the market.

In the market for cigarettes for example, consumers fail to recognise the full costs

resulting from the consumption of cigarettes (i.e. Smoking). This could be healthcare cost stemming from long term health problems and loss of income.

● With reference to figure 1, the marginal private benefit (MPB) of smoking is the

pleasure experienced by smokers for fulfilling their nicotine addiction, while the

marginal private cost (MPC) could be the cost of the cigarettes and other

associated cost of purchasing cigarettes.

● Consumers maximise their satisfaction by consuming until Qe where their MPB =

MPC. However, due to imperfect information, the perceived MPC of smoking a

cigarette is lower than the actual MPC of doing so.

● Under perfection information condition, the optimal equilibrium quantity is at Qa

where the actual MPC curve intersects with the MPB curve as shown in figure 1.

Hence, imperfection information leads to the overconsumption of cigarettes.



There is welfare loss incurred as actual MPC > MPB at Qe. Consumers will be

better off consuming less units of cigarettes until Qa.

● As a result, market is inefficient as too much resources is diverted to the market

for cigarettes and hence, the market is said to be not functioning well.

Body 2: Using a different example, explain how asymmetric information leads to market failure.

Definition: In the situation where economic agents involved in economic

transactions do not have the same amount of knowledge (i.e. asymmetric

information), information gaps between economic agents can result in distortion of incentives and markets to not function well (inefficient)

Adverse Selection

● Consider the case of buying health insurance where buyers have more

information about their general health than the insurance company can

hope to know, even if it insists on medical examinations.

● To purchase health insurance at a cheaper premium, all buyers would claim to be

in good health. The insurance company of course, cannot tell which buyer is in

good health, which buyer is in bad health. As a result, the market premium

depends on the average health condition of all buyers.

● However, if health insurance policy premium is set at the same amount for all

market participants, then the insurance policy at the prevailing market price is a

better deal for those who are unhealthy than for those who are healthy.

● (Healthy people are less likely to claim on the insurance and hence should pay a

corresponding lower premium, while the unhealthy people are more likely to

make claims and should pay a corresponding higher premium. Hence, at the

single market price, some unhealthy people will find buying the insurance policy a

better deal).

● Because unhealthy people are more likely to want insurance, the proportion

of unhealthy people in the pool of insured people increases.

● This forces the price of insurance to rise, and more healthy people, aware of their

low risks choose to not be insured.

● This further increases the proportion of people in bad health among the

insured, which forces the price of insurance to go up more.

● This process continues until nearly all the people who want to buy insurance are

unhealthy to a certain extent. At that point, selling insurance becomes

unprofitable so the insurance market collapses, resulting in what

economists call a ‘missing market’. Even though health insurance can



generate much welfare for society, the absence of such a good means that total

market failure has occurred and market did not function well.

● As a result, the market adversely selects only the people in bad health to take up

insurance resulting in market failure.

Body 3: Using another example, explain another consequence of asymmetric information leading to market failure.

Another consequence of asymmetric information is moral hazard.

Definition: This occurs when a person does not bear the full costs of his actions

because the cost is being borne by someone else. In this case, it is due to the fact

that the buyer knows more about his intended actions than the seller. The buyer

therefore has a tendency to engage in riskier behaviour which he otherwise would

not have engaged in, thus resulting in an adverse outcome which is detrimental to society.

Moral Hazard

● In the healthcare market, if an individual is not insured, the he is more likely to

take care of his own health, through exercising, taking health supplements or

going for regular health checks and hence reduce need to visit the hospital

frequently.

● However, if the individual was to insure himself with health insurance at full value,

he would be fully covered, and will not have to bear any addition cost in the event

of hospitalisation.

● As a result, the individual upon being insured, will have less incentive to

take care of his health and may be prone to visiting the hospital over minor

ailments. They may even have an incentive to seek medical treatments more

frequently and opt for more expensive and perhaps riskier services that they

would otherwise not required.

● Such change in behaviour results in the increase in consumption of

healthcare services and hence overconsumption of healthcare services.

Market hence over-allocates resources to the market for healthcare and not

function efficiently.

● (The payment from an insurance company lessens the burden on the individual in

the case of an admission to the hospital but the additional health care spending

generated by insurance represents a welfare loss to society.)




Level Knowledge, Comprehension, Analysis and Application Marks

L3 For a well-developed answers that exhibit rigorous and clear

explanation about how information failure can lead to markets to

not function well.

Answers are well-applied to a specific markets.

8 – 10

(9)

L2 For an undeveloped answers that have insufficient economic

rigour in explaining how information failure leads to market to

not function well.

Max 5m - Theoretical explanation of information failure with

minimal application to specific markets.

5 – 7

(6)

L1 For a largely irrelevant answer which may contain conceptual

errors.

1 – 4

(3)



Part (b) focuses on measures that both government and relevant economic agents (e.g. Firms) can implement to tackle information failure and hence market failure. While there may be many measures to tackle market failure, students are reminded to apply

appropriate measures more targeted to reducing information gap economic agents have, than other less relevant measures. As part of the question requirement, it is also important to consider different markets once again. Lastly, evaluative comments about

the appropriateness of measures are needed to access the 5 evaluative marks set aside.

(b) Discuss the appropriate measures to tackle information failure in the markets for different type of goods.

[15]

Question Approach:

Suggested Answer (b)

Introduction:

As mentioned in (a), information failure can lead to market failure and measures

relating to reducing information gaps are often implemented to tackle the problem of information failure.

Body 1: (For Imperfect Information)

Public Education and Campaign

To deal with imperfect information in the market, government often does public

education especially in the form of campaigns. In the case of demerit good such as

cigarette smoking, health programmes in schools and workplace and ‘I Quit’ smoking

campaign by the Health Promotion Board (HPB) in Singapore aims raise awareness of the harmful effects of smoking.

● Allows consumers to gain more information about the associated costs and benefits of smoking. It also allow consumers to pickup more tips and strategies related to quitting smoking.

● Consumers can get a better estimate of potential health risks and hence healthcare cost associated to consuming cigarettes. As their perceived MPC moves closer to the actual MPC, this will lead them to reduce their consumption of cigarettes from Qe to Qa (ref fig. 1) which leads to a more efficient outcome.

Limitations: However, even with more information and knowledge of the associated

cost, it is difficult to change behaviours such as habitual smoking, especially adult

smoking. In addition, consumers may not act rationally even with greater awareness

of the cost and benefits, especially in the case of teenage smoking (i.e. Teenagers are more likely to pick up the habit of smoking because of peer influence, not that

they are unaware of the harmful effects of smoking.)



EV: Hence, what is perhaps more appropriate is to consider early intervention

such as the anti-tobacco education programme in mainstream schools to raise

awareness of the harmful effects of smoking from young.

EV: More importantly, a one-time off measure (One-off, one message) will not be

as effective as a measures at multiple stages. Early intervention not only prevents

smoking initiation from young, it also adds additional touchpoints to encourage

smokers to quit. Such an approach is hence more appropriate to deal with imperfect

information related to smoking.

Next, to deal with asymmetric information, economic agents can consider different measures depending on the type of market and effects.

Body 2: (For asymmetric Information)

1. Screening (Adverse Selection)

In the case of adverse selection in the market for insurance in (a) for example,

insurance providers expect all potential policy buyers to undergo medical

assessment to ‘screen” and differentiate the low risk from the high risk

consumers. Otherwise, they also require potential buyers to declare their medical

history before purchasing insurance. ‘Exclusions’ listed may lead to non-claims (i.e.

claims cannot be made for illnesses resulting from past medical conditions); policy premiums may be adjusted to reflect risk level of potential policy buyers.

● This essentially implies that the insurance providers are able to gain more

information about policy buyers and hence price policies according to their

risk level. With a reduction in the information gap between buyers and sellers,

the extent of information failure can be reduced hence producing a more efficient

market outcome.

Limitations: However, one of the key issue with screening is while more information

can be acquired, it will not eliminate the problem completely as the extent to

which potential policy buyers will disclose information such as medical history varies,

and they may still exploit the information gap. Hence, ‘screening’ is a necessary

but insufficient measure.

2. Regulation and Legislation (‘Lemon’ Law) (Adverse Selection)

In the case of second-hand car market for example, adverse selection due to

second-hand car sellers having more information than car buyers leads to lower prices and lower average quality of cars eventually leading to a “missing market”.

● ‘Lemon’ laws are enacted to protect the interest of consumers. In Singapore for

example, a consumer would be able to make a claim for a defective product (also

known as ‘lemons’) within 6 months of purchase according to the Consumer

Protection Act. It is compulsory for a seller of a defective product to repair,



replace, refund or reduce the price of the defective product (subject to certain

conditions).

● This effectively allows the risks of getting a poor quality good at a higher price to

be transfer to or shared by the second-hand car seller for example. Second-

hand car seller aware of the law has less tendency to withhold information

from the buyer, hence reducing information gap.

● Should the seller refuse to make good on a defective product sold, consumers

can bring the issue up with the Consumers Association of Singapore (CASE) to

have them look into the matter on their behalf. CASE is a non-profit, non-

governmental organisation dedicated to protecting the consumer interest.

Limitations: There are limitations to the “Lemon” Law however. It may be difficult

determine the source of the defect of the product. For e.g, if the consumer had

misused the item and caused the fault, he or she will not be able to make claims. But

a consumer under the protection of ‘lemon’ law may argue otherwise. Also, while

second-hand goods and vehicles are included, "satisfactory quality" as stipulated

would take into account their age at the time of delivery and the price paid. This is

however subjective. The “Lemon” Law also does not apply to services or consumer-to-consumer transactions.

EV: Perhaps what is more appropriate is to consider changing the incentive of

producers. For example, the use of platforms where buyers can review about their

experience with sellers and rate their product and service will reduce sellers’

incentive to exploit consumers with their superior knowledge. Instead, they will have

a tendency to ensure that the accurate information is conveyed to consumers so as

to get a positive review from them. (Bad reviews may affect their future profits)

3. Direct provision of Compulsory all-inclusive Insurance Coverage

(MediShield Life) (Adverse Selection)

● Another measure to tackle the problem of adverse selection where the healthy

may choose not to get insured is a compulsory all-inclusive insurance coverage

directly provided by the government. The Singapore government for example

implemented MediShield Life where basic insurance is provided for all Singapore

Citizens and Permanent Residents. Enrolment is compulsory and risk is pooled.

● This helps to eliminate the problem of adverse selection. Lower-risk

individuals are mandated to remain in the scheme and hence get coverage.

● Such a measure corrects for the situation where there are non-participants in the

market (where market adversely selects only the high risk individuals, and the low

risk individual exits the market), which can prevent the situation of market

collapsing (refer to (a)).

Limitations: However, to provide insurance for everyone at an affordable premium,

government has to set aside huge amount of budget.



● With rising healthcare needs, claims may exceed the premiums collected, and

government may risk higher healthcare expenditure in the future which is not

sustainable.

● In addition, Medishield life also covers people with medical history (claims can

still be made on illness which exist prior to buying the insurance) which further

increases the risk government has to bear.

Note: Medishield life is NOT FREE. Citizens still have to pay for the basic insurance.

EV: MediShield Life however incorporated features of maximum claim limit, deductible

and co-payment to make it more appropriate. A maximum claim limit for example,

prevents exploitation of the scheme through incurring exceptionally large medical

bills. A deductible which is the amount an individual has to pay out-of-pocket

before the insurance kicks in also help to reduce the extent of moral hazard for

less costly small illness episodes. However, once the insured is aware that his or

her medical bill has exceeded the stipulated deductible amount, it is totally

ineffective in addressing the issue of moral hazard.

But while mechanisms of maximum claim limit, deductible and co-payment reduce the extent of moral hazard, it does not totally eliminate the issue.

4. Co-payments (For Moral Hazard)

● As mentioned briefly above, to tackle the problem of moral hazard, government uses the system of co-payments. Public hospitals in Singapore, which are government-owned, subsidises a proportion of the patients’ bills and require the patient to pay the remainder, a system that is known as “co-payment”.

● Individuals then have an incentive to make healthy lifestyle choices, despite the government’s subsidy of healthcare costs.

● In the case of insurance markets involving moral hazard, the insured patient will be required to pay an excess before claiming the insurance pay-out so that individuals will still prefer to take care of his/her health to avoid hospitalisation and not seek more expensive and even riskier services that they would otherwise not need or be hospitalised unnecessarily.

● But the insurance will still offsets some of the medical bills. The effect of co-payment is to increase the price of health care services from zero to some positive value so that quantity demanded of healthcare services is reduced. This can to made policy premiums more affordable.

Limitations: It can be difficult to determine the appropriate level of co-payment.

Healthcare costs in Singapore are high compared to neighbouring countries. As

such, the market for healthcare in Singapore relies on both public and private

insurance coverage to meet the high healthcare costs of individuals. If the co-

payment amount is too high, it is possible that some low income individuals have

difficulty paying the remainder of the hospital bills. If the co-payment is too low, the policy fails to solve the moral hazard problem.



EV: Co-payment is an effective policy because it encourages consumers to be partly

responsible for their own health, instead of relying on the state to provide healthcare

treatment. However, it can lead to a less equitable outcome if lower income

individuals cannot afford to pay the remainder of the medical fees leading to possible

unintended consequence of lower-income individuals not partaking in the market (for insurance for example).

Conclusion:

The effects and the extent to which information failure occurs in different markets

differ. In the real world, information is often imperfect. Hence, for policy measures to

be appropriate, there is a need to better study the markets in detail. More

importantly, consumers and producers need to make rational decisions based on the

available information. But information comes at a cost traditionally. In fact, firms in

the real world can profit from data-mining and selling information. Perhaps the more

important issue is not about making information available, but how market participants make use of information.



L3 For a well-developed and balanced answer that clearly explains appropriate measures to tackle information failure and their limitations. Answers are well-supported with appropriate examples in various goods/service markets.

8 - 10

L2 For an undeveloped answer which attempts to explain the appropriate measures to tackle information failure in various goods markets. Max 7m – For an answer that is one-sided Or Max 7m – For an answer which does not have a variety of appropriate examples to explain the measures.

5 - 7

L1 For an answer that is largely irrelevant or only contain superficial knowledge and understanding. Answer may have conceptual errors.

1 - 4



Evaluation

E3 For valued-judgements made on the appropriateness of measures well-supported with economic reasonings.

4 - 5

E2 For judgement(s) on the appropriateness of the measures that is largely unsubstantiated or unsupported.

2 - 3

E1 For an incidental evaluative comment. 1

Question 4

a) Explain the limitations of using Real GDP per capita to compare standard of living

between countries [10] Introduction:

Define Standard of living : the social and economic well-being of life. There is 2

aspects material and non-material SOL. The material aspect of SOL refers to the

amount of quantity, variety and quality of goods and service that can be enjoyed

while the non-material aspect of SOL refers to the intangible aspect of life such as the literacy rate/ education level, mortality rate, happiness level etc.

Define Real GDP per capita: refers to the value of final goods and services that an

economy has produced within the geographical boundary in a given period of time, with inflation and population size taken into consideration.

Limitation 1: The accuracy of the Real GDP per capita data collected

a) Hidden economy

● The accuracy of the real GDP per capita collected may not be equally accurate

for all countries and this can be affected by size of the hidden economy .

● Hidden economy refers to economic activities that are not recorded but has

economic values such as private tuition services or private home-based hair

cutting service, mother cooking for the family or cleaning of the house or making

a DIY cupboard from recycled materials.

● Hence these activities are not recorded in the value of real GDP per capita

understating the value of Real GDP

● For countries like Singapore where her Real GDP per capita is $90531 and Qatar

with $124927 => Qatar will have a higher material SOL than Singapore as the

people in Qatar has a higher income and can afford more good and services that

gain more satisfaction. However, due to the overemphasis on academic success



and small family size, Singapore has a larger hidden market such as private

tuition and home-based childcare service by the neighbours or grandparents

b) Income Inequality

● The real GDP per capita may not accurately reflect the material SOL due to

difference in level of income inequality of each country

● Income inequality is measured by Gini Coefficient, the value closer to 1 will imply

high degree of income inequality while the value closer to 0 will imply a low

degree of income inqeuality

● For a country that has high Real GDP per capita => an ave individual in the

country has high level of income and is able to enjoy more and better quality

goods and services => high level of material SOL. However, if the country also

has high Gini Coefficient value => most of the income is generated in the country

is distributed to only a small group of people in the country while the majority of

the people in the country only received a small amount of the income that is

generated in the country, hence the majority of people in the country is actually

experience a low M. SOL. => the Real GDP per capita do not accurately reflect

the M. SOL

Limitation 2: Non-material SOL is not taken into consideration

● The real GDP per capita reflect the non-material SOL

● When a country has high Real GDP per capita => the amount of goods/services

produced by an ave individual is high => high production. With high production

high level of pollution poor quality of air and possible increase in health

problem low non-material SOL.

Limitation 3: Difference in Cost of living is not taken into consideration

● Real GDP per capita do not into consideration the difference in cost of living

between countries

● One slice of pizze may cost $5 in Singapore but the same slice of pizza may cost

1 yuan in China, although the Real GDP per capita in SG is higher than China,

but no. of goods/service a person can buy in Singapore might be lesser than one

who is staying in China

Level Knowledge, Comprehension, Analysis and Application Marks

L3 For a well-developed answers that exhibit rigorous and clear

explanation about at least 3 limitations on the use of Real GDP

per capita in comparison of SOL between countries, with use

good and appropriate use of examples to illustrate the

limitations.

8 – 10

(9)



Max 8m – if only 2 limitations

L2 For an undeveloped answers that have insufficient economic

rigour in explaining the limitations on the use of Real GDP per

capita in comparison of SOL between countries, with use good

and appropriate use of examples to illustrate the limitations, with

little or no use of examples to illustrate the limitations

Max 5m – 1 well – developed limitation with some use of

example

5 – 7

(6)

L1 For a largely irrelevant answer which may contain conceptual

errors.

1 – 4

(3)



b) Discuss whether a depreciation in exchange rate of a country will improve the

standard of living of her population. [15] Intro:

Depreciation of exchange rate refers to the lowering of the external value of a

country’s currency and this will affect the export revenue and import expenditure of

the country. In turn, the change in the level of export revenue and import

expenditure will affect the standard of living. The standard of living of a population

refers to the quality of life, which can be measured by the change in both the material and non-material aspect of life.

Thesis 1: Depreciation of exchange rate will improve Material SOL

Depreciation of exchange rate for a country like Singapore price of SG export to

be cheaper in foreign currency increase demand for SG export by foreigners

increase in the AD of SG multiplied increase in RNY. In addition, the increase in

SG export demand higher production level in the industries of the export sector

such as tourism, medical equipment etc increase more need for factor of

production like labour increase employment. With higher employment level and an

increase in RNY actual E.G, SG households will have higher income higher

purchasing power afford to enjoy more and better quality goods like luxury bags or restaurant meals etc improve in material SOL.

EV: The extent of increase in export demand depends on

a) Non-price competitiveness of the export

b) PED of export Anti-thesis 1: Depreciation of exchange rate will worsen the material

Depreciation of exchange rate higher price of import in domestic currency lower

ability for Singaporeans to afford imported goods and service enjoy less quantity of M fall in material SOL

In addition, the price of imported FOP will also increase increase in COP for

domestic producers SRAS falling higher cost-push inflation domestic goods

are more expensive than before fall in affordability less domestic goods and service can be enjoyed fall in non-material SOL.

Ev: The extent of M dependency of a country

For country like SG, material SOL might fall because SG lacks domestic final

essential goods and services, eg food items and clothes etc PEDm < 1

depreciation will result in high imported inflation as well as significant increase in



import expenditure for household affordability will fall more than a country like

Australia or Malaysia where they have many domestic subst, so PED > 1

Household’s import expenditure will fall as they switch to domestic goods and lower

imported inflation. The material SOL for a country that is small and dependent on import likely to fall more that of a country that is large and less dependent on import.

Thesis 2: Government will have more tax revenue due to the export demand increasing

As mentioned, the depreciation will stimulate the economic growth of a country

households and exporting firms will have more income and profit more income

and corporate tax revenue can be collected more funds for the government

increase ability to spend on the provision of public and merit good such as defense

and healthcare/education making these goods more affordable more qty enjoy

material SOL improve. In addition, with greater access to healthcare and education healthier and more educated citizens increase in non-material SOL

EV: Depends on the budget objective of a government

For a developing country like Myanmar/Vietnam, the government may be more focus

on economic development of the country the amount of additional fund put into

economic developmental projects like industrial parks/land clearance for commerce

use/building of roads increase in non-material SOL will not be siginificant. While

developed countries like US/Norway, government may be more focus on achieving

sustainable growth more funds will be put into encouraging of green tech/healthcare/education improve non-material SOL more significantly.

Anti-thesis: Increase export demand higher pollution

As mentioned earlier, depreciation of exchange rate increase in export demand

and higher economic growth higher production of goods and service more

goods and service produced higher level of industrial pollution worsen non-material SOL

Ev: Depends on country’s government policy on regulating industrial pollution

Conclusion:

Small and open economy might not have improvement in the material SOL in SR,

but a persistent depreciation will worsen that material SOL due to the rising imported

inflation. while large and less open economy may be able to experience

improvement in material SOL. The improvement in the non-material SOL due to



depreciation will be dependent mainly on the government’s action rather than the depreciation of the exchange rate.


L3 For a well-developed and balanced answer that clearly explains how a depreciation in exchange rate of a country will affect the standard of living of her population positively and negatively. Answers are well-supported with appropriate examples in various countries.

8 - 10

L2 For an undeveloped answer which attempts to explain how a depreciation in exchange rate of a country will affect the standard of living of her population positively and negatively. Answers contains no/some appropriate examples. Max 5m – one-sided answers that only explains for either a) material or non-material SOL, or b) positively affect or negatively affect SOL.

5 - 7

L1 For an answer that is largely irrelevant or only contain superficial knowledge and understanding. Answer may have conceptual errors.

1 - 4

Evaluation

E3 For valued-judgements made on the appropriateness of measures well-supported with economic reasonings.

4 - 5

E2 For judgement(s) on the appropriateness of the measures that is largely unsubstantiated or unsupported.

2 - 3

E1 For an incidental evaluative comment. 1



IJC Prelim 2018 Paper 2 Question 5

Explain why strong economic growth is important but insufficient for most

developed economies and discuss appropriate policies governments can

adopt to achieve inclusive growth in their societies. [25]

Two main parts to the question:

(a) Explain why: provide reasons for

(1) Why strong economic growth is important for developed economies (2) Why strong economic growth is insufficient (focus more on this)

(b) Discuss appropriate policies govt… achieve inclusive growth in (various) societies.

Suggested Key Points for Answer Remarks

Strong economic growth can be interpreted as significant increases in output produced. Strong economic growth is important because it can bring about many benefits to the economy:

- Improve material SOL Strong EG -> significant increase in real national income -> increased disposable household income -> increase level of consumption -> increase material SOL - Improve and maintain non-material SOL For developed countries, strong EG can allow for sufficient taxes to be raised and to maintain government spending on key institutions like healthcare and education -> maintain literacy rates, healthcare standards -> important for non-material SOL - EG can reduce cyclical unemployment. With strong economic growth, firms increase derived

Students can also interpret as sustained growth i.e. actual + potential growth. Many students also wrote about economic growth influencing investors’ expectations and enhancing business confidence in the



demand for workers -> more workers are employed -> reduce cyclical unemployment.

However achieving strong economic growth is not sufficient for most developed economies because it can create more problems and compromise other goals:

- Achieve strong EG does not necessarily solve structural

unemployment problems that accompanies growth and

occurs due to globalization and technological changes.

- Strong EG is insufficient if Gini coefficient is high because

it may create greater socio-economic divisions in society

in terms of income as gains from growth increasingly

accrue to the high income earners.

- Strong EG can lead to greater ecological damage and

lead to irreversible effects on the living environment ->

not sustainable growth.

economy, thus attracting FDI. This is accepted as well if well-elaborated. These ideas can be developed into arguments. Since the command word is Explain, no evaluation is needed at this stage.

Inclusive growth refers to economic growth that is broad-based and benefits all segments of society, especially providing special consideration to the lower income groups or those adversely affected by structural changes in the economy. To achieve inclusive growth:

- Fiscal approach(adjusting tax and subsidies for

redistribution purposes)

a. Making taxes more progressive in the economy i.e.

progressive income tax. Raising the tax rates for higher

income groups. With economic growth -> higher income

levels -> those falling into higher tax brackets -> pay

Students may use the example of



higher taxes -> increase government revenue -> allow for

spending on various subsidies to the lower income

groups. Redistribution of income from the high-earners to

low-income.

(i) Is it effective? It is effective to the extent that

raising taxes on the higher income does in fact

increase the tax base/tax revenue. Income taxes

may incentivize residents to spend more time on

leisure and work less because the opportunity cost

of leisure has fallen (since the net benefits of work

is decreasing for an individual). If the higher

income earners work less, economic growth will be

reduced and income tax revenue would fall,

defeating the objective of achieving inclusive

growth at both ends.

(ii) Moreover, this is especially the case for countries

with relatively open borders to capital and labour

flows. Workers and firms can easily relocate to

other countries with better tax rates if these

countries were to make increase their tax rates. In

the age of globalization, this is increasingly a

concern for developed economies. Thus the option

of making taxes more progressive may not be a

very sound option. (Elaborate using AD-AS

framework if necessarily)

(iii) Are there other trade-offs? Depends on the

society’s value system and political preferences.

Depends on government’s efficiency, corruptibility,

and whether NGOs and non-profits are already

playing an active role in the economy.

b. Direct subsidies for lower-income such as GST vouchers,

income supplements.

(i) May indirectly create inflation via increased

consumption and rise in AD that blunts the

effects of the monetary benefits. Inflation is

particularly bad for the lower-income

workers as their wages tend to stagnate

and rise slower than inflation due to slow

productivity growth in these jobs. This

erodes purchasing power of households

and may be counter-productive to achieving

inclusive growth.

negative income taxes used in some developed economies such as Singapore. Workfare is a type of negative income tax where low-wage earners are given income supplements by the government. This not only serves to reduce the income inequality and promote inclusivity, but also creates further growth via actual (income transfer increases C and AD) and potential growth (incentivizes more older workers to enter the labour



c. Means-tested policies in areas such as healthcare,

housing and education.

(i) Allows benefits of economic growth to be more

widespread to all segments of the population

especially to those who cannot afford it.

d. Supply-side policies to target slow growing industries and

their workers.

(i) Subsidies for sunset industries

(ii) Retraining for workers who are structurally

unemployed e.g. SkillsFuture

e. Trade policies

(i) Protectionist policies to target certain

disadvantaged or declining industries. Evaluation ideas:

(i) What’s appropriate in the short-term may not be

appropriate in the long-term

Use of protectionist policies and other subsidies may be

feasible in the short-run to cushion the negative

impact of globalisation and slow productivity growth

on some sectors, but could lead to worsening market

inefficiencies and incur high opportunity costs for the

economy. Instead the government needs to find ways

to improve factor mobility across sectors and allow

more people to participate in high-growth sectors and

enjoy the benefits of strong economic growth.

(ii) Growth is important and should not be sacrificed in

return for inclusivity. -> incentives should not be

heavily distorted to favour less work and reduce

growth.

(iii) Depends on specific country’s economic context and

current challenges confronting the economy ->

different set of policies may be more appropriate.

force and take on low wage jobs).


3 High L3: Expect a thorough knowledge of facts and theory with an excellent

ability to describe and explain in a precise, logical and reasoned manner.

Considerations of the different consequences of economic growth to

15 - 20



developed economies and the appropriateness of policies to achieve

inclusive growth should be clearly justified. New illustrations and

examples apposite to the materials discussed should be introduced as

further evidence of the ability to recognize the principles of the question

and their application to relevant current situations. Students should be

able to criteria referenced the context where policies could be

appropriate overall and when it is not appropriate.

Low L3: Expect a good knowledge of the facts and theory of the question, clear

evidence of the ability to use the facts and theory with accurate

reference to the question with a novel application. Answers address the

reasons for pursuing strong economic growth in developed countries and

highlights why it may not be sufficient. Clear discussion of

appropriateness of various policies to achieve inclusive growth

introduced with a range of policies introduced.

2 High L2: Explanation of relevant reasons for why economic growth is important

but insufficient for developed economies. A two-sided answer with

mention of various policies to achieve inclusive growth and an attempt to

explain them and consider their limitations. The answer will be relevant

to the question but the theory may be incompletely explained.

Low L2: Expect an accurate although undeveloped explanation of the facts

relating to the question together with an explanation of the theory, and

evidence of some ability to discriminate and form elementary

judgements. BUT do not expect a clear logical presentation. There will

not be much evidence of the ability to recognise unstated assumptions,

nor to examine the implications of a hypothesis, nor the ability to

organise ideas into a new unity.

Max 9: Answer only addresses the consequences of economic growth.

Max 10: Well-presented ONE SIDED argument of various policies to achieve

inclusive growth.

- 14

1 High L1: Answer shows some knowledge but does not indicate that the

meaning of the question has been properly grasped, Basic errors of theory or an inadequate development of analysis may be evident.

Low L1: Where answer is mostly irrelevant and only contains a few valid points made incidentally in an irrelevant context.

1- 8

E3 For an answer that (so far as required by the question) builds on appropriate

analysis to evaluate critically alternative theoretical explanations,

contemporary issues, perspectives and policy choices, that recognises

unstated assumptions and evaluates their relevance, and that

synthesises economic arguments to arrive at well- reasoned judgements

4- 5



and decisions.

E2 For an answer that makes some attempt at evaluation or a conclusion that

answers the question but does not explain the judgement or base it on

analysis.

2- 3

E1 For an answer that gives an unsupported evaluative statement(s). 1

6 Globalisation often has influences on economic agents in an economy. Consumers, producers and government are affected by the increase in trade, labour and capital mobility from globalisation. Discuss whether globalisation will always be desirable to the different economic agents in an economy.

[25]

Command: Discuss

Content: Consequences of globalization

Context: General context but answers should be linked to different economic agents, government, consumers and producers.

Question requirement:

1) Effects of globalization a. Increase in Trade b. Increase in capital c. Increase in labour

2) Considerations of the different economic agents a. Government b. Consumers c. Producers

3) Desirability a. Government: Achieving microeconomic (Efficiency, SOL, equity) or

macroeconomic goals (Economic Growth, low inflation, low unemployment and satisfactory BOP).

Organization of the answers:

Recommended organization: Either by the agents or by desirability and undesirability

then infused the effects of globalization into the answer. Considerations of

possibilities and likelihood of the effects occurring and application to the real world

context would best answer the question. Given the open nature of the question and

the limited time constraint, the priority of the answer should be on the differing



agents. All answers should be directly addressing the effects of globalization and should not just briefly mention globalization.

Consequences of globalization

Increase in Trade Globalization enhances connectivity between economies. With better communication technology, economies are able to import goods and services across different economies. E.g. Online shopping platforms like Amazon and Taobao facilitates the sales of goods and services between economies. Better transport technology also enable economies to trade at a lower cost. E.g. With better transport technology like more lightweight vehicle materials from cast iron and steel to magnesium aluminum alloys and carbon fibre constructions will allow for faster and more efficient transportation. Products could be transported at a faster rate and more products could be transported, therefore average cost of production is lower.

Government Desirable only when economies have the comparative advantage in the production of goods and services. Increase demand for exports from better connectivity with different economies, higher demand for the goods and services. In addition, with lower transport costs, prices of exports can be lower, given that exports have many substitutes available from the international market, demand is price elastic. Quantity demanded will increase more than proportionately, where export revenue will increase. Links to the different Aims: Increase net export, increase AD, and increase actual economic growth. Improves trade balance in current account of BOP. ***Countries without CA, would end up importing more goods and services. Fall in domestic consumption of goods and services if imported goods are close substitutes with high cross elasticities. They would experience a decrease in actual economic growth and a worsening of trade balance in current account of BOP.

Consumers Desirable in the short run when consumers have access to the goods and services.



Prices of goods will be lower for the consumers from PE to PW while they enjoy a higher quantity of goods and services from Qe to Q2. The variety of goods and services enjoyed will also be higher since an economy opened to free trade from globalization can access the goods and services from different economies. E.g. Consumers in Korea do not just have access to automobiles like Kia and Hyundai but also automobile from Japan like Honda and Toyota. Consumer surplus also increased from with free trade. *** In the long run, the consumption of additional imports could mean a lower domestic consumption if they are substitutes, especially for larger economies that has their own domestically produced goods and services which are potential close substitutes to those in the world market. The fall in domestic consumption will reduce AD, resulting in a fall in RNY for the consumers who might have lesser purchasing power and therefore lowered ability to demand for more goods and services, decreasing SOL.

Producers Undesirable if the goods produced are substitutes to the trading partners. Close substitutes with XED >1, the demand for domestic goods will fall by more than proportionately resulting in a fall in total revenue for the producers. With globalization and more trade, price falls from PE to PW, quantity sold would fall from QE to Q1, producer surplus would also fall. *** If complements, the demand for the domestic goods might increase bringing about more revenue. E.g. if the company offers transport services, the imported goods and services would require delivery services provided by the domestic market



enhancing the revenue. If the traded goods are factors of production that could be purchased at a lower price, this will bring about cost savings for producers, increasing their overall revenue.


Increase in Capital Better information technology meant that investors would be better able to attain information about the different economies and therefore invest in the different countries based on the information. Furthermore, better information flow facilitates more accurate business plans and encourages FDI flow between economies. E.g. Facetime facilitates meetings across different economies. Better transport technology would allow the management team to travel between economies for more face to face administrative and management meetings. In addition, with more outsourcing and offshoring possible, there is greater segmentation of production processes, increasing capital flow between economies. *Outsourcing: Moving internal operations to a third party. Moving transactional activites to the experts to give an organization the capacity to focus on its expertise. *Offshoring: Primarily a geographic activity. Takes advantage of the cost differentials by relocating factories from costly countries to cheaper economies.

Government Desirable only when economies complement with relevant regulations to ensure sustainability of the economy. Increase in long term capital inflow brings about an increase in AD leading to actual economic growth. Increase in quantity of capital leads to an increase in productive capacity of the economy, LRAS shifts to the right, economy enjoys potential economic growth. In addition, long term capital inflow leads to an improvement in the capital and financial account of BOP. However, with more foreign direct investments in the economy, especially in manufacturing sectors where there could be production of air pollutants or electronic wastes that could pollute the environment, it would lead to a lowering of the non- material standards of living in the economy. Despite enjoying the economic growth, the environmental degradation would stunt the growth rate in the long run due to the exponential depletion of the resources from excessive use and pollution, making growth unsustainable. E.g. In China where it is the world manufacturing factory, air



pollution from carbon emission if energy production is an imminent problem where the government is recently implementing measures and regulation to reduce the pollution problem. ***If the capital flows were able to enhance and develop more green technology transfer, it would be more desirable for the economy and growth would be more sustainable.

Consumers Undesirable when the capital inflow brings about market dominance and not more competition in markets. For small economies where the capital inflows that are often huge MNCs, tend to dominate the economies. MNCs usually have larger production output and enjoys a higher economies of scale where the lowered AC enjoyed is able to be translated to lower prices when firms pass on their cost savings. Lower prices of the goods by MNCs, leads to a decrease in demand for domestic goods and services. In cases where they are close substitutes and XED>1, the decrease in demand would be at a greater extent and domestic firms might suffer a subnormal profit. When that persist in the long run and the domestic firms shut down, MNCs will dominate the domestic market. With market domination and lack of substitutes, MNCs will enjoy a more price inelastic demand where they would charge at a higher price in order to earn more revenue. The higher price charged and the lower output would be undesirable for consumers where they would have been exploited by the MNCs that are dominating the market.

Producers Desirable only when producers are considering outsourcing or offshoring or when they are the ones expanding their market overseas. Capital mobility-> better outsourcing-> Enjoys a lower cost of production by expanding production processes in other economies. E.g. Assembly work that is more label intensive was outsourced to countries like Taiwan, China for some electronics like smartphone. Especially for countries with higher labour cost, the outsourcing of this assembly process that is labour intensive would reduce the cost of production for the producers. Expansion of sales market overseas-> e.g. Franchise-> increase



consumer market-> Increase potential demand for the good-> higher output-> increase ability to enjoy economies of scale -> e.g. technical economies of scale where production processes have been specialized and labours could increase productivity by focusing on one production process.


Increase in Labour Better information technology allows individuals to easily hunt for jobs in other economies. E.g. jobbatical and NPAworldwide works are job agencies that recruits globally and enables labour to be more mobile across different economies. Transport technology allows labors to be geographically mobile and able to travel easily across different regions. E.g. With more airlines that could fly further and faster enhances traveling experience and encourages more travelling and labour mobility. In fact, there are considerations for supersonic and hypersonic flight that could cut journey times by half.

Government Undesirable if it brings about non- inclusive growth. Labour mobility Increase inflow of low skilled labour-> increase supply of low skilled, low wage labour-> decrease wages for low wage labour-> widens income gap Increase inflow of high skilled labour-> increase supply of high skilled, high wage labour-> decrease income for high wage labour-> reduce income gap *** Dependent on the economies preference for the labour and whether the foreign labour policy is targeting the higher or lower skilled labour Generally desirable when considering the inflation of the economy. Higher supply of labour-> reduction in labour cost across all sectors of the economy-> decrease unit COP-> increase SRAS-> reduce cost push inflation ***Only if the economy is the one attracting labour, usually for developed economies, the labours from developing economies tend to flow towards developed economies in the hope to find jobs that offers a higher pay.

Consumers Desirable if economy is labour intensive and prices of goods and services are lowered as a result of lowered cost. Increase in available labour supply-> lowered wages-> lowered cost of production for firms-> pass on cost savings to consumers-



> lower prices and better accessibility to the goods and services. ***If it’s labour intensive and labour takes up a higher proportion of the total cost of the firms, the cost saving would be significant and the lowering of prices could happen. Or Increase in supply of labour-> better able to engage the high skilled labours who can engage in product innovation and research-> improvement in quality of the products or increase in the variety of goods and services available-> higher satisfaction derived.

Producers Desirable for producers in developed economies than developing economies. Increase in available labour supply-> lowered wages-> lowered cost of production for firms-> Reduction in AC-> Increase in total profit

The reduction in cost would shift AC1 to AC2, together with MC, new market Qmax2 and new Pe2 brings about a higher supernormal profit. ***If it’s labour intensive and labour takes up a higher proportion of the total cost of the firms, the cost saving would be significant and the increase in profits would be significant




3 High L3: Expect a thorough knowledge of facts and theory with an

excellent ability to describe and explain in a precise, logical and

reasoned manner. Considerations of the different consequences

of globalization and the different effects on government,

consumers and producers should be explicitly explained. New

illustrations and examples apposite to the materials discussed

should be introduced as further evidence of the ability to

recognize the principles of the question and their application to

relevant current situations. Students should be able to criteria

referenced the context where globalization could be desirable

and when it might be undesirable.

Low L3: Expect a good knowledge of the facts and theory of the

question, clear evidence of the ability to use the facts and theory

with accurate reference to the question with a novel application.

Answers could be a good mix of differing consequences on

consumers, producers and government, anchoring on trade,

labour and capital mobility with a balance discussion on the

desirability.

Max 15: If students only mention 2 out of the 3 economic agents where analysis is well presented

15- 20

2 High L2: Evidence of an ability to identify the consequences of

globalization on the different economic agent, some ability at

graphs where relevant, fair ability to apply known laws to new

situations where answers are more theoretical. The answer will

be relevant to the question but the theory may be incompletely

explained.

- 14



Low L2: Expect an accurate although undeveloped explanation of the

facts relating to the question together with an explanation of the

theory, and evidence of some ability to discriminate and form

elementary judgements. BUT do not expect a clear logical

presentation. There will not be much evidence of the ability to

recognise unstated assumptions, nor to examine the implications

of a hypothesis, nor the ability to organise ideas into a new unity.

Max 12: If students only mention 2 out of the 3 consequences where

analysis is well presented.

Max 12: Well presented ONE SIDED argument.

1 High L1: Answer shows some knowledge but does not indicate that the

meaning of the question has been properly grasped, Basic

errors of theory or an inadequate development of analysis may be evident.

Low L1: Where answer is mostly irrelevant and only contains a few valid points made incidentally in an irrelevant context. Max 8: If only one agent has been explained but well balanced analysis with considerations of the different effects of globalization. / If only one consequence of globalization has been explained with considerations of the different economic agent.

2- 8

E3 For an answer that (so far as required by the question) builds on

appropriate analysis to evaluate critically alternative theoretical

explanations, contemporary issues, perspectives and policy

choices, that recognises unstated assumptions and evaluates

their relevance, and that synthesises economic arguments to

arrive at well- reasoned judgements and decisions.

4- 5

E2 For an answer that makes some attempt at evaluation or a conclusion

that answers the question but does not explain the judgement or

base it on analysis.

2- 3

E1 For an answer that gives an unsupported evaluative statement(s). 1



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